Equity and Trust - Research Proposal Example

of the of the Equity and Trust Thesis ment Though the common law relating to charitiesrequires a purpose to create some advantage to the general public in addition to the immediate beneficiaries, this principle has been applied inconsistently and resulted in injustice. However, the Charities Act 2006 will deal with existing anomalies and put the law in this regard onto a logical basis, preventing organisations which benefit only a privileged minority from benefiting from the tax advantages resulting from charitable status. Discussion The legislative intent of the charitable deduction is to provide an economic incentive for individuals to support worthy causes. A donor who makes cash contribution receives a tax subsidy equal to his or her marginal ordinary income tax rate. For the donor who makes a property contribution, the tax subsidy also includes the capital gains tax rate that would have been incurred had the property been sold and the net-of-tax cash proceeds donated. While prior studies have focused on the price and income elasticities of the total amount given, this study provides estimates of separate price and income elasticities for cash and property donations. Although cash contributions are generally found to be price elastic, property contributions are price elastic only for high income taxpayers. These results suggest that the current tax-favoured status for donations of appreciated assets by taxpayers other than the wealthy should be reassessed. These findings are also important when considering alternative tax system proposals, such as the flat tax which does not permit a deduction for charitable contributions. It is not only the charitable status of private schools and hospitals that is threatened by the provisions of the draft Charities Bill. The removal of the legal presumption, which will require charities to positively prove the benefits delivered to the public, will challenge the charity status of many faith-based organisations as well. How, for example, does an enclosed order of nuns legally constituted as a charity demonstrate convincingly to a secular society the inestimable benefit to the wider community of intercessory prayer The legal presumption in this case and many others is not an anachronism, as officials appear to be suggesting. Rather it is a necessary device to protect those charities that deliver indirect benefits not subject to the rude gaze of public scrutiny. To combat harmful discrimination by private tax-supported groups, society should, at a minimum, maximize use of all currently existing legal tools. One such tool used by the federal government against private groups (whether tax-supported or not) is the conditioning, under civil rights laws, of the receipt of federal financial assistance (FFA) on the recipient's agreement not to discriminate. However, these civil rights laws have not been interpreted broadly enough to apply to private, tax-supported organizations based solely on their receipt of tax benefits. Moreover, current tax exemption is not absolute. A sovereignty perspective illuminates those rules in the tax scheme that operate to curtail rather than enhance the economic strength of the charitable sector. After all, rival sovereigns rarely feel comfortable letting the other grow too powerful.[sup2] Indeed, John Simon uses the sovereign-sounding term "border patrol" to describe the function of statutory provisions that limit charities' political and lobbying activities, and that tax income from commercial activities.[sup3] Thus, thinking of charity as a co-sovereign to the state explains not just blanket exemptions based on organizational form, but also those seemingly peculiar tax rules that, paradoxically, reduce the reach and effectiveness of tax exemption. Subsidy theories have been articulated for over a century, while base-defining theories are of surprisingly recent origin. Under the subsidy theory, tax exemption functions as an inducement to charities to undertake specific activities or to engage in behaviour a certain Way.[sup22] For example, under the classic conception of this "quid-pro-quo" approach, the state bestows tax exemption in recognition of charities' lessening the burdens of government.[sup23] The subsidy theory, however, places charities in a position subordinate to the state, which can decide which particular activities lessen its burdens.[sup24] To the extent the state is unhappy with--or simply uninterested in subsidizing--certain charity activities, the state can fine-tune the exemption.[sup25] By contrast, the base-defining theory deems charitable activity not even to rise to the level of taxable activity. For example, if the income tax base consists of income from business activities, then charities not engaged in business necessarily fall outside the tax system. A base-defining theory accordingly accepts the challenge to ascertain which activities conducted by the entity should be entitled to "charitable" status, and which should be cast into the world of taxable activity. Moreover, unhappily for charity, current tax exemption schemes--whether at the state or federal level--contain conditions and limitations on the freedom of charities to own untaxed property and to engage in untaxed commercial enterprises. To the extent these limitations go further than necessary to preserve the correct tax base, only the sovereignty perspective can explicate these echoes of the old mortmain prohibitions. The exemption method is emphatically an encouragement to public benefactions. On the contrary, the grant method extinguishes public spirit. No private person thinks of contributing to the support of an institution which has once got firmly saddled on the public treasury. The exemption method fosters the public virtues of self-respect and reliance; the grant method leads straight to an abject dependence upon that superior power--Government.... The exemption is wholesome while the direct grant is, in the long run, pernicious. To some observers, the income tax exemption scheme for charities is both a crude mechanism to match foregone revenue to desired outputs and is unacceptably open-ended. However, such criticisms make sense only under a subsidy approach, rather than under a tax-base approach. Under a nonsubsidy approach, the inability to target or control the growth of the tax exemption follows from the premise of an untouchable base. Taking issue with the subsidy approach, scholars in recent decades have attempted to cast every aspect of the tax-favoured regime for charities into tax-base-defining terms. With respect to charities, tax-exempt status is not classified as tax expenditure because the nonbusiness activities of such organizations generally must-predominate and their unrelated business activities are subject to tax. In general, the imputed income derived from nonbusiness activities conducted by individuals or collectively by certain non-profit organizations is outside the normal taxbase. However, the ability of donors to such organizations to claim a charitable contribution deduction is a tax expenditure (because such contributions do not generate income to the donor), as is the exclusion from income granted to holders of tax-exempt financing issued by charities. Some tax-exempt organizations appear to conform to the model of the typical for-profit corporation. Hospitals represent one rather clear example of this type. When the corporate model is appropriate, the tax expenditure list should include the nontaxation of the business and investment income of the organization. Under this approach, no deduction should be allowed to the organization for distributions to beneficiaries, because it is not administratively feasible to include the charitable benefits in the income of the various beneficiaries. This treatment is akin to the second-best approach adopted for certain types of corporate gifts and fringe benefits. Moreover, it is difficult to defend the continuing practice of exemption on subsidy grounds: Such a crude mechanism does little for labour-intensive charities, and has its highest value to owners of the most highly-taxed assets, thus inducing overinvestment in high-taxed, inner-city real estate. Fairness as well as efficiency is implicated: "Since the bulk of charitable property is located in urban centres, the overpaying group is likely to be relatively poorer than the proper donor class which benefits from charitable activities." By the same token, exemption can be a useful subsidy to stimulate needed capital investment. Thus, from colonial times, states have also granted exemptions to infant business industries, a practice enjoying a resurgence as states deliberately choose the tool of property-tax exemption to entice business relocation. To the extent charities engage in job-creating "desirable" industries, such an input subsidy makes sense for them as well. In Britain, tax benefits from cash gifts accrue primarily not to donors but to charities, which must meet certain conditions to recover taxes on donations they receive. The changes in the law are primarily designed to lift restrictions that made it difficult or impossible for charities to get back money on many gifts. Among other measures, the new law: Abolishes the 250 ($350) minimum limit for donations to qualify for tax relief. Now, gifts of any size can qualify for the break, though charities may decide on their own that some gifts are too small to make reclaiming the tax on them cost-effective. Abolishes the 1,200 ($1,680) maximum limit on tax relief for giving through payroll deductions. Now, employees can choose to make gifts of any size through payroll deductions, and the entire sum can qualify for a tax break. Promotes payroll giving by adding a 10 percent supplemental tax break on such donations made before April 2003. Provides an income-tax break to donors of certain shares and securities, based on their full market value. Taxpayers who donate such shares not only pay no tax on their capital gains but are entitled to use such gifts to reduce their income tax -- all the way down to zero, in theory. Exempts from inheritance tax any bequests made to charity. The government has committed 1-million ($1.4-million) to the promotional campaign, while charities have added 350,000 ($490,000). The changes are already having an effect on giving in Britain. Before the law took effect, less than 1 percent of donors used Gift Aid, a tax-relief provision dating from 1990 that benefits charities. Since the 250 threshold was eliminated, however, 23 percent of charities are asking donors to use Gift Aid, and more than half of their donors are agreeing to do so. Yet preliminary data also seem to indicate that the tax changes so far have not attracted many new donors or inspired many existing donors to make large increases in their gifts. Rather, revenue increases appear to be due to more donors making their gifts in ways that benefit charities. Donors who use Gift Aid must confirm that they are British taxpayers for the charity to be eligible to recover the tax. But the law also loosened that requirement; such assurances can now be given even over the phone or via the Internet, which opens up new fund-raising areas for tax-effective giving. When someone gives 100 to charity through Gift Aid, for example, the charity can apply to recover a tax of 28.21, making the donation worth 128.21. Higher-bracket taxpayers are entitled to claim as personal deductions, however, the difference between the basic tax bracket and the higher one. When a donor in the 40-percent tax bracket gives 1,000 to charity, for example, the charity gets an additional 282.05 while the donor sees his or her tax reduced by 230.77. The relaxing of Gift Aid requirements alone is likely to add between 200-million and 400-million a year ($280-million to $560-million) to charity coffers, according to an estimate by CAF and the National Council for Voluntary Organizations. By persuading donors to use the Gift Aid mechanism, charities can realize a 28 percent increase in their income at no extra cost to donors. Even if donors give no more than they did before passage of the law, charities stand to gain an additional 150-million a year by recovering taxes on gifts that previously would have been too small to qualify for the program. In an attempt to encourage Britons to make greater use of payroll deductions, furthermore, the government until 2003 is adding an extra 10 percent to such gifts. A charity that receives 50 from a payroll-deduction plan gets an additional 5 from the government. The value-added tax, imposed throughout Europe at the point of sale of many goods and services, still applies to many transactions involving charities. The British government contends that it has no authority to modify VAT provisions because they are a creation of the European Union. But the new tax structure opens up tax-effective giving possibilities at both ends of the income scale. For all its potential benefits, however, it remains to be seen how the British public and the country's 185,000 charities will respond. Works Cited Brophy, Michael. Charities and Tax: A Plea to the Chancellor. Economic Affairs, Feb/Mar90, Vol. 10 Issue 3, p28 Beugge, Charlotte. DON'T FOLLOW THE HERD -- GIVE CHARITIES A TAX BREAK. Daily Mail, 10/18/2006, p86 Richard Dyson. British Campaign Aims to Raise Awareness of Tax Advantages on Charity Gifts. Daily Mail Read More